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The Case for Calm Over Rising Health Costs

IN 1946, a British newspaper shocked its readers by running an article with this ominous-sounding headline: “Nearly Half of U.K. Student Grades Are Below Average.” Read that back to yourself slowly, and you’ll realize, of course, that the law of averages would have it no other way. But man, does it sound bad.

Mr. Baumol and a Princeton colleague coined the term “cost disease” in the early 1960s. Put simply, it refers to the concept that the costs of health care, education, the live performing arts and several other “personal services” depend largely on human evaluative skills — a “handicraft element” that is not easily replaced by machines. These costs consistently rise at a rate much greater than that of inflation because the quantity of labor required to produce these services is hard to reduce, while costs in other areas of the economy can be brought down via technology or other factors What that means, writes Mr. Baumol, a professor at the Stern School of Business at New York University and a professor emeritus at Princeton, sounds pretty frightening: “If health care costs continue to increase by the rate they have averaged in the recent past, they will rise from 15 percent of the average person’s total income in 2005 to 62 percent by 2105.” In other words, our great-grandchildren will have less than 40 cents of every dollar to spend on everything besides their health. Like the British headline, that surely sounds like cause for alarm.

It’s a testament to Professor Baumol’s lucid prose, though, that economists and noneconomists alike will find it easy to grasp his surprisingly comforting argument for why we shouldn’t panic. In fact, he asserts, we will be able to afford the cost of these services in the future — unless we fail to understand the nature of this phenomenon.

“The critical point here is that because politicians do not understand the mechanism and nature of the cost disease, and because they face political pressures from a similarly uninformed electorate, they do not realize that we can indeed afford these services without forcing society to undergo unnecessary cuts, restrictions and other forms of deprivation,” says Professor Baumol, who shares research credit for the book with five other contributors.

How can his point be true? Because productivity is on the rise.

“Although costs of personal services appear to be out of control, they are actually falling in terms of the labor time required to earn enough to pay for them,” he explains — in other words, consumers need to work fewer hours to afford them.

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Patricia Wall/The New York Times

This sets the stage for an even more compelling, and paradoxical, point. The biggest threat to our quality of life comes not from these big-ticket items, he says. Rather, it comes from other products — like guns and fossil-fuel-devouring vehicles — that are continually declining in relative cost because less and less work is required to produce them.

“We can afford to pay more for the services we need — chiefly health care and education — and probably will always be able to do so,” he writes. Labor-intensive things like police protection, mail delivery, sanitation, legal and funeral services will also continue to stay within our reach, he says. “What we may not be able to afford are the consequences of falling costs: environmental destruction and continual warfare.”

As the cost of health care continues to be a battering ram in the 2012 presidential campaign, Professor Baumol’s seemingly academic treatise contains a couple of zingers that one can imagine President Obama incorporating into his stump speech. The future is bright, this book argues, as long as policy makers don’t do things that are sure to bring on the storm clouds.

“The very definition of rising productivity ensures that the future will offer us a cornucopia of desirable services and abundant products,” he writes. “The main threat to this happy prospect is the illusion that society cannot afford them, with resulting political developments — such as calls for reduced government revenues entwined with demands that budgets be in balance — that deny these benefits to our descendants.”

Are you listening, Paul Ryan? Because Professor Baumol seems to be talking directly to you.

This book is a quick read, packed with charts and case studies. But it is the author’s command of storytelling that makes it not just digestible but also enjoyable. In a section explaining the evolution of America’s oft-lamented throwaway society, he relates his own struggle to repair his father’s beloved gold-filled pocket watch, made in 1915. Even when the watch was new, he recalls, his father had to pay someone $10 to disassemble and clean it each year. Today, though, that service costs a few hundred dollars and is harder to find. Which is why Professor Baumol wears a $7 wristwatch — and why, when its battery runs out, he will very likely toss it out and buy a new one.

IN general, though, Professor Baumol seems bent on persuading us not to toss out the kinds of labor-intensive and increasingly expensive things that give our lives quality: Mozart quartets, annual physical exams, and, yes, welfare programs for the poor. But only enlightened government action and increased public awareness, he says, will keep the baby from going the way of the bath water.

Contrary to appearances, he concludes, the cost disease’s “disquieting consequences threaten not just our pocketbooks but also our way of living.”

He adds: “We are not powerless to deal with its most damaging prospects, but as even Adam Smith warned, we cannot afford to sit back and rely on the invisible hand of the market to provide all the necessary remedies.”

A version of this review appears in print on October 7, 2012, on page BU3 of the New York edition with the headline: The Case for Calm Over Rising Health Costs. Order Reprints|Today's Paper|Subscribe